Rothschild Executives Sue UBS Over Failed U.K. Tax Shelter

Three NM Rothschild & Sons Ltd. executives sued UBS AG (UBSN), Switzerland’s biggest bank, in London for advising them to take part in a personal tax shelter that lost them money.

Anthony Alt, deputy chairman of the firm, Robert Leitao, the firm’s head of U.K. global financial advisory and Nigel Higgins, its co-head of global investment banking, are seeking a total of 1.25 million pounds ($2 million) from UBS and ProAct Financial Ltd. over the advice, dating back to 2004.

The three London bankers, on UBS and ProAct’s suggestion, invested in an unregulated collective investment called Film Development Partnership IV LLP so they could claim the fund’s losses against their income, according to the lawsuit, which was filed in February and became public this week. UBS allegedly didn’t warn the men of the risks of buying into the fund, which invested in film financing, distribution and development.

The men were told the “highly aggressive tax avoidance mechanism” was “all but certain to produce, by reason of the tax relief which would result, a return in excess of the investment,” according to the suit. “Such representation was false.”

After an inquiry, the U.K. tax department, Her Majesty’s Revenue & Customs, rejected the fund’s tax return which claimed partnership losses. The bankers were then unable to claim any of the losses on their personal returns, according to the suit.

Vigorous Defense

“We are aware of the proceedings, and we will vigorously defend ourselves,” UBS spokesman Oliver Gadney said in an e-mailed statement.

A woman who answered the phone at West Midlands, England-based advisory firm ProAct said its chairman, Paul Dunbar, wasn’t available to comment. None of the three plaintiffs responded to phone messages. A spokeswoman for Rothschild said the matter is personal.

The U.S. Justice Department last year dropped a criminal case against UBS, after the Zurich-based bank admitted it helped about 17,000 Americans evade taxes. UBS paid $780 million and handed over account data to resolve the matter.

In the London case, the executives were told the risks related to “the prospects of an investment return, rather than an entitlement to tax relief and also in relation to possible future legislative change regarding the regulation of film schemes,” according to the suit. “They were not warned that there was a very high risk attached to the prospects of the proffered tax relief.”

‘Silent Cry’

Film Development Partnership IV was sponsored by Little Wing Films Ltd., the lawsuit said. Little Wing’s films include “9 Dead Gay Guys,” “Tabloid,” and “Silent Cry,” according to the Internet Movie Database.

Little Wing was involved in a similar lawsuit filed in 2007, when around 75 British bankers and executives sued accounting firm Baker Tilly over allegedly negligent advice that they could cut their tax bills by investing in movies. Guy Hands, the chairman of Terra Firma Capital Partners Ltd., claimed to have lost almost 12 million pounds when the plan turned out to be flawed. The case settled in 2008, Accountancy Age reported.

Tax breaks known as Section 48 and Section 42, introduced in the 1990s, allowed individuals to offset movie investments against their earnings, lowering or deferring the amount of income tax due in a given year.

The rules were revised in 2006 “so that the relief goes where it was always intended to go -- to those who produce films and employ talent,” HMRC spokesman Jan Marszewski said. “The loopholes which allowed the tax relief to be abused with no benefit to the film industry have been closed. If we find evidence of abuse we will take steps to put things right.”

The case is Robert Mark Leitao & ors v. ProAct Financial Ltd. & ors, case no. 10-4193, High Court of Justice, Queen’s Bench Division (London).

To contact the reporter on this story: Lindsay Fortado in London at lfortado@bloomberg.net.

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.

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